One "side benefit" of the free-and-easy mortgage money of just a couple of years ago - virtually every homeowner could use their home as a piggy bank - tapping its seemingly-limitless equity for virtually any expense - necessary or fun money. Rates were at prime or slightly higher, and banks begged you to establish your line.
Equity appreciation, they felt, were an automatic to rise forever. Risks to the lender? Naah! Even if the lines went unpaid, the property against which they were collateralized were a sure bet to increase in value.
Not so anymore!
During those salad days of 2004 to 2006, here in Chicago and elsewhere, otherwise-responsible homeowners would tap up to 100% of their home's appraised value. They would pay off high-interest credit card debts, private school tuition for their children, start a business, or finance a boat or luxury car.
Now, many of those same homeowners have first mortgages at or exceeding the present market value of their homes. Their drawn equity lines put them over the top - sometimes, far over the top. To avoid further loan losses, many lenders are freezing Home Equity Lines of Credit, or reducing the amount of the lines. This is being done in addition to far-tighter guidelines and percentage of equity the lines can be established for in the first place.
One New York homeowner had his equity line, drawn to renovate his master bathroom, frozen before he could draw a penny of equity money. Another had her available credit line cut in half after she completed a kitchen remodelling project.
A third homeowner, in California, was advised by his own Mortgage Broker to draw the balance of his $750,000 line in cash, and deposit it in his bank account. He paid 6.9% interest on the drawn equity funds, but eliminated the possibility of the issuing bank freezing his loan.
Since 2004, delinquencies on HELOC's have increased over 500% - 1.74% of all Home Equity Line of Credit Borrowers are at least one month in arrears in their payments, according to First American CoreLogic, a lending research company out of San Francisco CA. As the credit and real estate crisis continues in many areas of the U.S., experts expect this percentage to increase, perhaps considerably.
Traditional mortgage money has already been released into the hands of homeowners. It cannot be "called back." However, Home Equity Lnes of Credit can be easily frozen or reduced.
As Don Romano, President of Shelter Rock Mortgage in Long Island NY, explains: Lenders "got into a risk position by being too generous with the credit lines, and credit lines are the only form of mortgage they have the ability to minimize."
Read our post today @ BlogChicagoHomes.com for more info, as well as a link to Ellen Yan's article in last Sunday's Chicago Tribune.
DEAN & DEAN'S TEAM CHICAGO
Going under water with the value of the home relative to its current payoff and HELOCs having people having to pay off that debt has put a tremendous squeeze on many people Dean.